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Federal Reserve to Lend Directly to Primary Dealers

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The Federal Reserve enacted new “initiatives” on Sunday, March 16, taking steps to calm financial markets that will be responding when they open on Monday to news of the failure of Bear Stearns and the possibility that more firms could be headed for trouble, and the acquisition of that broker/dealer by JPMorgan Chase for a stock swap that is worth, according to JPMorgan, the equivalent of about $2 per share. The Fed’s extraordinary moves are “designed to bolster market liquidity and promote orderly market functioning,” according to a statement on its Web site.

The Fed will have available on March 17 a new “lending facility,” that will enable the banks and broker/dealers that are “primary dealers” to directly borrow from the Fed at an interest rate that “will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.” The Fed also on March 16 cut the rate it charges to the most creditworthy of its Discount Window borrowers, which borrow at the “primary credit rate,” to 3.25%, and tripled the duration of those loans from 30 days to 90 days. The Fed added that it would take as collateral “a broad range of investment-grade debt securities.” The new lending entity “will be in place for at least six months and may be extended as conditions warrant,” according to the Fed’s announcement.

The primary dealers include, according to the Fed’s Web site: Banc of America Securities LLC, Barclays Capital Inc., Bear, Stearns, Inc.,Cantor Fitzgerald & Co.,Citigroup Global Markets Inc., Countrywide Securities Corporation, Credit Suisse Securities (USA) LLC, Daiwa Securities America Inc., Deutsche Bank Securities Inc.,Dresdner Kleinwort Wasserstein Securities LLC.,Goldman, Sachs & Co., Greenwich Capital Markets, Inc., HSBC Securities (USA) Inc., J. P. Morgan Securities Inc., Lehman Brothers Inc., Merrill Lynch Government Securities Inc., Mizuho Securities USA Inc., Morgan Stanley & Co., and UBS Securities LLC.


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